A franchise is an ideal option for an individual aspiring to be an entrepreneur. It combines the freedom and flexibility of a small business with the backing and resources of a large organization. If you opt for a franchise, you get a product, brand equity, and the organization’s infrastructure at your disposal. However, don’t let these perks make you think that you don’t have to make any effort to start a franchise. You still need to have the capital to pay the hefty franchise fee, royalty fee, and operational costs. There are many alternatives when it comes to financing your franchise. According to studies, a franchise is still a small business, so you should consider a small business loan for its financing.
As with all types of financing options, there are pros and cons of small business loans to finance your franchise. You should weigh the advantages and disadvantages of small business loans before choosing this type of financing for your franchise. Read on to find out what they are.
Access to Capital
The primary benefit of small business loans is that they provide business owners (including franchisees) access to funds. Business owners can use these funds for the purpose of founding, purchasing, or grow their ventures. These loans provide access to small business owners to large sums of money for their ventures. This type of money may not be able to small business owners through other sources. It is one of the most appealing features of small business loans for franchises.
Long Term Funding
Research indicates that a significant majority of Small Business Administration (SBA) loans have long terms such as ten to twenty years. Although borrowing rates have a big role in the feasibility of a loan, lengthier terms contribute significantly to decreasing the monthly payment sum. Longer terms of small business loans are often the reason many businesses can continue paying back the loan conveniently. Thus, pick a small business loan for your franchise if you plan to return it over an extended period of time.
Unvarying Interest Rates
Nearly all conventional business loans come with variable rates. The logic behind fluctuating rates is that lenders want to guarantee they don’t suffer if the cost of capital increases. Small business loans, on the other hand, must follow a fixed interest rate. Consequently, some small business loans come with interest rates as low as in the single digits. These fixed interest rates can assure you of the stable costs of borrowing over the years of repayment.
Regulated Interest Rates
The SBA does not decide the interest rate on the loan since the lending and borrowing parties set it themselves. However, the SBA does control the interest on the loans under its supervision. Small business loans come with a maximum rate that the lender can ask for. Thus, franchisees that opt for small business working capital via small business loans have the benefit of regulated interest rates. You don’t have to worry about the lender charging you higher interest rates than the other in the market.
Easier to Obtain for Franchises
It is simpler for franchises to get small business loans as they have a larger organization backing them. Franchisees don’t have to struggle to launch a brand-new product in the market or make customers from scratch. They also follow the business model of the franchisee, so they have a higher chance of succeeding. These factors favor franchises in their probability of securing a small business loan. So, your franchise may stand a better chance of getting a small business loan if you apply for it.
Greater Initial Fees
Small business loans may charge more initially since the SBA has to underwrite the loan request and takes a fee. There is also a fee to top off the guarantee fund. On the other hand, borrowers can get many of these fees added to the loan. It is helpful to keep these fees in mind before applying for a small business loan for your franchise. If for some reason, you cannot get the fees added to your loan, you must have some cash to pay these fees upfront.
Small business loans take longer to come through because both the lender and the SBA need to underwrite them. The SBA may do its underwriting part in a longer amount of time as it is a government institution. According to studies, it would take some time and paperwork for these loans to get through. So, apply for these loans if you can spare some time waiting before starting out your franchise. You may not be able to get cash in hand quickly as they can take months to come through.
Although the SBA guarantees the funding, a qualified lender or bank still must approve the loans. As such, small business loans are dependent on lenders’ approval, even if the SBA has confirmed them. Besides, if the SBA does not approve the lender, the process becomes slow. The lender would then have to get approval from the SBA for the loan to go through.
Moreover, your franchisor would have to undergo screening by the SBA, if it hasn’t been done so already. The process of screening would take up time, adding to the time already consumed by the underwriting and approval steps.
These requirements add an approval step to the already extensive process of securing a small business loan. So, apply for these loans only if you have the time and patience to go through all the above steps.
The small business loan is one of the most attractive choices among all loans available in the market for franchisees. The SBA usually backs these loans, and their lending partners fund the loans. So, they appear to be quite an enticing offer.
Practically, these loans are somewhat like conventional term loans by a bank or any other lender. The distinguishing factor of these loans is that the SBA guarantees a part of the loan, thus decreasing the lender’s risk. The lenders thus become incentivized to present loans having lesser interest rates and longer reimbursement time than they would.
Another factor to remember is that the franchisee must have enough control over its business as opposed to the franchisor. If the franchisor appears to have too much control over the franchise, it would be hard to get the loan. Small business loans are for individual small businesses so a franchise must qualify as sufficiently self-governing to get the loan.
One of the most effective alternatives to finance a franchise is undoubtedly a small business loan. Therefore, if you possess the financial means and credit ranking to qualify, you must totally go for it. However, remember that the eligibility requirements can be rigorous, and the application procedure is a lengthy one. You must cautiously reflect on your chances of getting a small business loan approved. You must measure the pros and cons carefully before deciding on this type of financing. Securing a small business loan would take you time and energy, so choose it if you are sure of succeeding.